Stock Markets Or Casinos?Research On The Lottery Effects Of China's Stock Markets

China' s stock market has developed rapidly,and it has important influences on the development of the economy.However,at present there is a structural imbalance in our securities markets;i.e.,individual investors play a dominant role in it.Moreover,relevant studies have shown that individual investors prefer the investments in lottery.Therefore,the speculative behavior of individual investors may affect their own investment income and even influence the market pricing mechanism.Based on this point,this paper investigates the lottery effects on the returns of China's Stock Market.This paper collect ten-year data for 305 A Stocks in Shanghai Stock Changes and check whether and how the maximum daily stock returns at a given month affect the following month stock returns.Following the traditional analytical tool,i.e.univariate portfolio analysis,we find out that 10 decile portfolios formed by ranking the maximum daily returns of previous months have significantly different average excess returns and this does not depend on whether equal-weighted returns or value-weighted returns are calculated.It preliminarily proves the existence of lottery effect in China's stock market.We also check the raw returns and the intercepts(Fama-French 3-factor alphas)from the regression of equal-weighted returns on a constant,the market return a size factor and a book-to-market factor for the 10-1 difference portfolio.There are significant differences between the raw excess returns for the equal-weighted case and the difference between two alphas is statistically significant for both cases.It verifies that the lottery effect dose exist in China's stock market,and could not be explained by three factor model.The Fama-Macbeth estimation indicates a significantly negative relationship between one-month lagged maximum return and the return in the following month,which is in concordance with the negative return of the 10-1 difference portfolio.Finally,we construct an aggregate risk factor for the lottery effect and estimate the Fama-French augmented 4-factor model using 10 decile portfolios afore mentioned.The new four-factor model is a good description of the yield of high MAX portfolio,thus successfully applying the factor model to explain the lottery effect.This paper could not only help us to deepen our understanding of lottery stock and lottery effect,but also plays an important role in regulating investors' investment behavior and promoting stable development of our stock market.